Economic Insights - December 2016

Elections have consequences and the impact of the 2016 U.S. election on U.S. economic policy will be enormous.

One of the Republicans’ first tasks will be repealing much (but not all) of the Affordable Care Act, also known as Obamacare. To get that done, they will use the budget reconciliation process in the U.S. Senate, where they don’t need to break a filibuster with sixty votes; instead, they only need a simple majority. This budget process can be used to quickly eliminate three major components of the law:

Although you may hear about “compromises” on children staying on parent’s insurance plans and pre-existing conditions, those aren’t really compromises. Rules that aren’t budget related can’t be repealed thru a budget bill. But, expect the Department of Health and Human Services to change some rules to substantially slim down health insurance; the result will look more like catastrophic insurance, and, therefore, it will be much less expensive.

Net-net, this means not only a big cut in government spending but lower implicit marginal tax rates. Right now, large Obamacare subsidies remove an incentive for lower middle income and poor people to earn more money. The dollar value of working more hours and earning more income is offset by the loss of subsidies.

Next: Expect a big supply-side tax cut, particularly on capital investment. Also, look for a big drop in the tax rate on regular corporate profits. The only problem will be getting enough Democratic votes for the super-majority needed to make these changes permanent. Tax cuts passed with only a simple majority are limited to just ten years; that was true of the Bush tax cuts passed in 2001.

Entitlements are another big area of concern. Several years ago, House Speaker Paul Ryan developed a plan to block-grant Medicaid to the states, similar to how the welfare system was block-granted to the states in 1996 under President Clinton. Look for that to happen later in 2017, especially if the GOP decides to temporarily leave Medicaid alone when it repeals other parts of...